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What is Dai stablecoin? A 5-minute guide to Dai

Michiel Mulders
May 19, 2020
DAI, stablecoin, crypto, cryptocurrency, cryptonews, fintech, borrow BTC

Dai Stablecoin is a decentralized cryptocurrency created by MakerDAO via the Maker's Dai Stablecoin Platform. It is comparatively different from its peer stablecoins as Dai's value is backed by crypto collaterals instead of USD and its crypto collateral can be publicly accessed on Ethereum blockchain. 

The Dai Stablecoin preserves its value against various major currencies of the world through margin trading which aids it in its response to ever-changing market conditions. Its current market cap is USD 109,455,001 and its current circulating supply is 108,674,806 DAI

First, let’s learn how Dai is able to maintain a stable value?

How Does Dai Stablecoin Maintain a Stable Value?

Dai Stablecoin is a decentralized cryptocurrency and one DAI is equal to 1 USD and it will always remain at the same rate until & unless these coins are removed from the circulation.

MakerDAO's Dai stable coin maintains a stable rate against USD through various stabilization mechanisms. Dai Stablecoin is a crypto-backed coin unlike its peer stablecoins and this means that MakerDAO backs the value of its stable coin through crypto collateral held on its platform.

The creators of Dai Stablecoin have devised a unique and very clever way to maintain DAI's stable rate against the USD. Dai provides incentives to its users to maintain the rate of one DAI to 1 USD. Dai users can pay off their debts in the MakerDAO's system when the Dai stablecoin price goes below 1 USD as they pay off their debts at a fixed rate of 1 USD against one Dai, whereas they were able to purchase the Dai at a lesser price. 

On another hand, when DAI's price goes above 1 USD, the Dai stable coin users can create Dai to sell in the market, and hence, this leads to the stabilization of Dai's price against the USD as the market supply of DAI increases and the price lowers.

What’s the Relationship Between Maker and Dai Stablecoin?

Maker is the organization behind DAI Stablecoin and it was started in 2015. However, MakerDAO sold MKR tokens privately to fund the development work overtime instead of relying on traditional initial coin offerings. 

The DAI Stablecoin was launched at the beginning of 2018 and it has seen a great deal of success since then. The MKR token holders influence annual borrowing fees, crypto-collateralization ratio, and the emergency shutdown protocol inside the MakerDAO's platform. 

How Does the Stability Fee Works?

The users borrowing DAI Stablecoin are charged a floating interest rate and this interest rate is known as the stability fee. The holders of Maker Token set the stability fee in MakerDAO's platform. The Maker Token holders vote to decrease or increase the stability fee to normalize the rates of Dai relative to the USD. 

The users who borrow Dai must return all the borrowed Dai along with the stability fee to the MakerDAO's platform to redeem their collateral. The accrued stability fee can be paid in Dai or Maker token

In the context of MakerDAO, governance can be divided into two main parts: on-chain and off-chain. MKR token holders, who are the primary stakeholders of the system, vote using the Maker Protocol's on-chain governance system. There are two types of votes in this system, Governance Polls and Executive Votes. Anyone who owns MKR can participate in these votes. Stakeholders participate in governance off-chain by engaging with the community and other stakeholders in places like the forums and the public governance calls. The Interim Governance Facilitator is currently tasked with several administrative duties that keep the larger community organized, proactive, aware, and ready to make decisions.

Learn more and introduce yourself to MKR Governance here.

How to Earn Interest on Dai Stablecoin?

The Dai stablecoin holders can earn interest on their Dai deposit in the Dai savings rate contract. The interest earned on the Dai deposit is referred to as the Dai Savings Rate. The Dai savings rate is set by Maker token (MKR) holders. 

A user can start earning an interest rate on their Dai in three steps and these steps are: (1) Buy Dai; (2) Install a Web3 Browser like Metamask & transfer the funds to the Web3 browser; (3) Deposit funds in the Dai Savings Rate contract to start earning interest.

It is to be noted that the MKR holders vote to reduce the Dai Savings Rate when Dai's market value goes above $1. A decrease in the Dai Savings Rate leads to a decrease in the demand for Dai and hence, the value of each Dai stabilizes to $1 again. 

Alternatively, the MKR token holders vote to increase the Dai Savings Rate when the value of Dai goes below $1, and hence, this increase in the Dai Savings Rate leads to an increase in the demand for Dai. The value of each Dai again stabilizes to $1 when the increase in Dai Savings Rate causes a spurt in demand for Dai. 

Further, you can use DAI tokens with YouHodler to earn 12% APR interest. Find out more about YouHodler’s DAI savings or other crypto saving products.

What Is the Difference Between Dai and Sai?

The MakerDAO platform was only supporting ETH as collateral for Dai loans initially and this smart contract system was known as single-collateral Dai. Later on, the Maker token holders voted to upgrade to multiple-collateral Dai, which could support multiple crypto assets as collateral for Dai on November 15, 2019. Basic Attention Token (BAT) & USD Coin (USDC) are the new collateral types that were voted into the Maker platform. 

How Does Dai Stablecoin Work?

Previously, MakerDAO platform users deposited ETH to Maker's smart contract and thus created what was formerly called a Collateralized Debt Position (CDP) but has now been renamed Maker Vaults.

The Maker Vault is a primary aspect of the Maker Protocol and it organizes the creation of Dai against locked up collateral. The total supply of Dai is collectively altered by Vault usage and users can create Dai by generating it against their collateral. Additionally, they can also destroy Dai when repaying their generated Dai balance. This process happens entirely on the blockchain which enables full accountability of circulating Dai and all the collateral associated with it.

Vaults are always overcollateralized and come with a Liquidation Ratio that vault owners must uphold in order to avoid liquidation of their positions. Furthermore, there is a debt ceiling on the Maker Protocol (globally) in addition to individual Vault types.

To learn more about how Dai stablecoins work and about Maker Vault, check out this incredible resource from the Maker team explaining everything in great detail.

What Can You Do With Dai?

One of the major uses for DAI is to act as a counterweight against the volatile nature of major cryptocurrency assets such as Bitcoin or Ethereum. DAI Stablecoin's stable value is good for traders and investors who believe that the market may go down anytime soon. Investors consider Dai to be the most ideal crypto asset for holding because of its stability. 

Top Five Benefits of Dai Stablecoin

1. Become Financially-independent From The Traditional Financial System 

The traditional financial companies require a lot of personal data for accessing financial services, whereas DAI Stablecoin allows everyone to access financial services regardless of their financial situation. Dai token is also stable in comparison to its peer cryptocurrencies including the major cryptocurrencies like the Bitcoin or Ethereum. 

2. Access Built-in Savings

The Dai token holders earn the Dai Savings Rate (DSR) on their holdings of Dai tokens after locking in their Dai into a special smart contract without any fees, geographic limits, liquidity-related constraints or any minimum deposit requirements. The user can also withdraw any portion of their Dai holdings at any time. 

3. Volatility-Free Stablecoin 

The DAI Stablecoin offers an option to cryptocurrency users to hold on to a stable cryptocurrency among the world of volatile cryptocurrencies. Dai is backed by MakerDAO through a surplus of collateral in Maker vaults and it is soft-pegged to the US Dollar. The crypto users can store Dai during market uncertainty without abandoning the cryptocurrency space. 

4. Versatile & Fast Means of Payment

The means of sending payment across borders through traditional financial channels is time-consuming and expensive. For example, a user must pay $9 as an additional fee to Western Union for transferring $1000 from a Western Union location in the United States to an Argentinian-based Western Union branch. On the other hand, the users can transfer Dai peer-to-peer anywhere in the world within seconds by paying only a minor gas fee. 

5. 24/7 Availability 

The traditional financial companies operate during traditional business hours, whereas Dai is available to users round the clock as it is built on blockchain and it is decentralized. 

The Future of DAI Stablecoin 

MakerDAO’s aim is to present DAI as the first unbiased currency of the world. To achieve its goal, MakerDAO will have to ensure that Dai is used by millions of people around the world and this herculean task would require marketing as well as education in addition to MakerDAO's branding efforts. The road ahead is paved with a lot of challenges for Dai but no other stablecoin is as well-positioned as MakerDAO's Dai.

About the Author
Contributor

Michiel Mulders is a blockchain developer with a passion for the crypto space. His interests include blockchain, entrepreneurship, marketing, and carefully crafted beers. Cheers!

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